Thursday, July 21, 2011

Record High North Dakota Oil Production in May

1. A new record for monthly production: 1,120,4576 barrels, a 21% increase from last May, and a 75% increase from two years ago (see chart above).

2. A new record for average daily production: 361,438 barrels.

3. A new record number of wells producing: 5,329

4. A new record for oil-related jobs: 15,200 (see chart), which is more than double the number of North Dakota oil jobs two years ago.

Related News: "North Dakota Tax Commissioner Cory Fong says taxable sales and purchases the first three months of the year totaled $3.5 billion, an increase of nearly 34 percent over the year. Fong says officials expected the state's economy to remain strong but were still surprised by the level of the increase. The five cities with the biggest percentage increases for the first quarter all are in western North Dakota's booming oil patch."

North Dakota's impressive economic success clearly illustrates some of the benefits of domestic energy production: more jobs, record economic growth, huge gains in personal income, and even more tax revenues. There's no reason that the economic success of North Dakota can't be duplicated elsewhere, if we would only open up more U.S. land and off-shore areas to domestic energy exploration and drilling.

Update: "According to a new study from the Western Energy Alliance, North Dakota oil production could soon outpace imports from oil-rich nations like Russia, Iraq and Kuwait.The Bakken formation spanning North Dakota and Montana will lead oil production in the region, with an expected 685,000 barrels of oil and condensate a day by 2020 (Note: That's almost double the current daily production)."

45 Comments:

What you need is a reality check. To do that just look at the numbers that you are citing.

You have 5,329, most of which have been drilled in the past two or three years, producing an average of 67 barrels per day. Since the ND sweet price is about 35% lower than Brent oil you are looking $5,000 of revenue per day for wells costing several million to drill and deplete rapidly.

And this is the good scenario that has us looking at the static picture. As you know, the easy oil is extracted first because it makes financing easier. This means that future wells will be less productive and more expensive. And that more and more new wells will have to be drilled just to keep production flat. How does this happen when most of the producers can't make money if they are forced to deplete the drilling costs according to what the production data implies?

My bet is that you are helping to hype up another bubble and that some time in the future you will try to claim that the bubble was not possible to see until after the collapse.

Apparently Tesaro Petroleum and BNSF Rail are buying into the "bubble", with major investments in ND crude production.

BNSF is a major transporter of ND crude to refiners. The railway could ship out 730,000 barrels daily in the future.

Tesaro is preparing its Anacortes, WA facility to refine 30,000 barrels a day of ND crude, brought in by rail.

This is to replace dwindling Alaska crude shipments.

If ND oil production were viable why not just build a pipeline? The fact that the railways and refineries will take the oil is not a surprise because it is clear that production could get to as much as 500,000 bpd if enough money is spent on drilling. But there is no way to sustain that production with 70 bpd per well, drilling costs of several million, and huge decline rates even in the best parts of the shale formation.

Keep in mind the fact that the oil is selling for a 35% discount to Brent even though it is of much higher quality. The data tells us all that we need to know but only if we are willing to be rational.

For the very same reason that we have not built one form Canada to the US:

"A coalition of 89 Big Green environmental groups is urging President Obama to reject Canada's efforts to secure U.S. approval for construction of the Keystone XL Pipeline, which would bring millions of barrels of oil extracted from Canadian shale formations."

"Benji's" friends on the left are spending millions of tax exempt dollars on destroying the American energy sector.

"In particular, rural states have been subsidized for generations--and still need ever-increasing amounts of federal dole ... We have created an entire weakling rural USA economy, as pink as a pigs eye."

The flaws in your arguments have been pointed out so many times by now that only an idiot would have failed to grasp them. Suffice it to say that the small percent of the US population that through their efforts out produces every agricultural sector on earth would find someone like you less than impressive.

They ARE building pipelines - lots of them. From a recent Brigham Exploration investor presentation, here's a graphic showing the cumulative capacity additions planned and u/c for the Williston Basin:http://img832.imageshack.us/img832/2961/willistonbasintakeawayc.jpg

Yes, that's over a million barrels a day, including multiple pipeline projects.

Original source is here:http://ir.bexp3d.com/common/download/download.cfm?companyid=BEXP&fileid=444363&filekey=8a278635-0756-4202-a50d-ad1b46d6536a&filename=BEXP%20Q4%202010%2002.25.2011.pdf

For the very same reason that we have not built one form Canada to the US:

"A coalition of 89 Big Green environmental groups is urging President Obama to reject Canada's efforts to secure U.S. approval for construction of the Keystone XL Pipeline, which would bring millions of barrels of oil extracted from Canadian shale formations."

The greens are against tar sands development. Their letter did not mention the word shale once but brought up the tar sands six times. I suggest that you read more carefully next time.

The explanation is much simpler. There is no capital to take oil from wells that only produce 70 bpd but cost millions to drill. The producers are not cash flow positive and have no way to maintain a high production rate for very long. Shale oil is the latest scam that was created when shale gas became a profit loser for the producers.

Sprewell: "Vange, if this is a bubble and you see the collapse coming, why not short these ND shale companies? There are benefits to seeing more clearly than others, ;) assuming you're right.?"

Do you believe that he isn't?

I am sorry Ron but I never bet on the end of stupidity. Worthless shares can be propped up for a very long time and shorting only offers a 100% gain potential. I prefer to be long at all times in sectors that are in a secular bull market. It may not be exciting but it is far safer and much easier. I have been long energy since 2000 and will continue to be long energy for quite some time. Right now I love coal companies and am hoping to see a slight pullback for the uranium producers so that I can load up. I continue to hold producers of oil with lots of reserves in safe areas of the world because as I user of gasoline I need to cover my natural short by being in the sector. (The same is true of the ag sector. As a person with a family that needs food I like to offset my natural short position by being long profitable ag sector companies.)

They ARE building pipelines - lots of them. From a recent Brigham Exploration investor presentation, here's a graphic showing the cumulative capacity additions planned and u/c for the Williston Basin:

http://img832.imageshack.us/img832/2961/willistonbasintakeawayc.jpg

You are looking at pipelines that use mostly conventional and tar sands production. Nobody is betting that ND will be able to produce 500,000 bpd for the 25 years that a pipeline will last. This is why the oil is delivered by train.

Original source is here:http://ir.bexp3d.com/common/download/download.cfm?companyid=BEXP&fileid=444363&filekey=8a278635-0756-4202-a50d-ad1b46d6536a&filename=BEXP%20Q4%202010%2002.25.2011.pdf

This is good. Let us look at what the presentation tells us.

You have a company with 58 wells producing around 11,000 bpd. Why is anyone supposed to be excited about this?

And look at the slides. They compare theoretical finding costs and look to the difference in pricing between oil and gas but not at the total profitability of the ventures. The slide uses $94 per barrel but does not point out that the company is lucky to get $70 because of the ND sweet discount.

And did you get the fact that the estimated EUR is not supported by actual production data but is an internal estimate? This is actually very interesting because the EUR that is picked can impact the reported profits. Which is why I like to look at the cash flow of companies like Brigham. And when I do, I still see a lot of red ink. Which explains why the presentation is so full of promotion and so little on detail and substance.

That's 350K bpd in pipeline capacity planned for the next several years.

This is hiding the pea and diverting attention from the true picture. First, you are including pipeline capacity designed to take conventional and tar sands oil to market, not exactly relevant when talking about shale oil from ND. Second, you are looking at the entire basin, not just ND, where production is supposed to be 350 Mbpd and growing. Third, you are including gathering pipeline capacity, which will only bring the oil to the terminals where it will be loaded on tanker cars.

If ND were viable you would have a pipeline of 350 Mbpd capacity just for that state. The fact that you don't tells us quite a bit more than you are willing to admit. Like I said, an average well production of 70 bpd is nothing to get excited about. I remember when a decent well used to produce 10 Mbpd.

You are wrong. Only one of the pipelines I listed - the Keystone XL - will be used for tar sands. All of the other ones are Bakken-exclusive projects.

As I wrote above, you are also looking at gathering pipelines that take oil from wells and deliver it to train loading terminals. Take those and the Keystone out of the picture and you see very little capacity that is incapable of handling the production that is supposedly going to be increasing in the area. This is why the ND sweet discount to Brent was running at 35% or so earlier in the year. As I said, there will not be a large pipeline because over a 25 year life you can only justify a very low capacity line that will gather from a very wide area.

Dude, Brigham Exploration is just one of dozens (hundreds?) of companies drilling the Bakken. There's no dominant company there, which is why even a larger one like BEXP has only 11K bpd of production.

Your typical Bakken well costs something like $6 million. Let's say Williston Basin oil is only going for $70/barrel ... $6 million / $70 = payout after 85,712 barrels. Throw in a decent profit margin plus a bit of interest paid to the bank for the loan for the well and you get to maybe 100K-120K barrels until you've got a profitable well. Finally, notice from the BEXP presentation that lots of Bakken wells are still producing and are well beyond 120K barrels produced in total to date. At this point those wells are 100% pure profit.

I laugh hysterically at your claim these things aren't profitable.

If ND were viable you would have a pipeline of 350 Mbpd capacity just for that state.

At this point I am forced to call you dimwitted, or maybe just stubborn. That 350K bpd IS just for ND Bakken production. A few of them even have the word "Bakken" in their name. Duh.

I repeat: The chart I linked shows planned takeaway capacity of over 1 million bpd in several years, of which 350K bpd consists of future pipeline expansion projects. Only 100K bpd of that is for a pipeline which will also be used for Canada's tar sands. So some simple math and you discover that the great majority of that planned capacity is for Bakken-exclusive:

350K - 100K = 250K.

Duh.

And that doesn't even count existing capacity, the majority of which is pipeline capacity, not rail.

Dude, Brigham Exploration is just one of dozens (hundreds?) of companies drilling the Bakken. There's no dominant company there, which is why even a larger one like BEXP has only 11K bpd of production.

And most are cash flow negative. Their 'profit' only comes from EUR estimates that are usually not supported by production data.

Your typical Bakken well costs something like $6 million. Let's say Williston Basin oil is only going for $70/barrel ... $6 million / $70 = payout after 85,712 barrels. Throw in a decent profit margin plus a bit of interest paid to the bank for the loan for the well and you get to maybe 100K-120K barrels until you've got a profitable well. Finally, notice from the BEXP presentation that lots of Bakken wells are still producing and are well beyond 120K barrels produced in total to date. At this point those wells are 100% pure profit.

The average well produces 70 bpd. Yes, some wells are very profitable. But the average well does not seem to be very profitable. And you have to add all of the costs, including royalties, various lease payments, employee costs, environmental compliance costs, administrative, etc.

Keep in mind that the first wells drilled were in the best areas. If those produce so little oil how much less will the more marginal area wells produce?

I laugh hysterically at your claim these things aren't profitable.

But they aren't. Some wells will produce a very healthy profit. But most will be losers.

At this point I am forced to call you dimwitted, or maybe just stubborn. That 350K bpd IS just for ND Bakken production. A few of them even have the word "Bakken" in their name. Duh.

No. You cited an image for the Williston Basin, which includes production from Montana, Alberta, and Saskatchewan. The presentation also deals with the Williston Basin. You need to read more carefully.

I repeat: The chart I linked shows planned takeaway capacity of over 1 million bpd in several years, of which 350K bpd consists of future pipeline expansion projects. Only 100K bpd of that is for a pipeline which will also be used for Canada's tar sands. So some simple math and you discover that the great majority of that planned capacity is for Bakken-exclusive:

350K - 100K = 250K

First, you are talking about the entire Williston Basin, which includes production from Montana, Alberta, and Saskatchewan. Second, some of the pipelines cited are just gathering lines that will bring oil to train terminals. If the hype were right you would need an increase of 300 Mbpd capacity increase for ND only. But you are not right and are hyping marginal oil production just as the clowns were hyping unprofitable shale gas not that long ago.

And most are cash flow negative. Their 'profit' only comes from EUR estimates that are usually not supported by production data.

Wow, this was almost stunning in its ignorance! First of all, the profitability of any project is not determined by cash flow, it's determined by its return on investment. And if you look at ppg. 34-39 of the BEXP presentation I linked above, you'll learn that, given the costs and prices discussed above, typical Bakken wells will reach the ~100K-120K total production anywhere from 100 to 300 days after completion. That's just 4-10 months until the well is paid for and profitable.

The average well produces 70 bpd. Yes, some wells are very profitable. But the average well does not seem to be very profitable. And you have to add all of the costs, including royalties, various lease payments, employee costs, environmental compliance costs, administrative, etc.

Keep in mind that the first wells drilled were in the best areas. If those produce so little oil how much less will the more marginal area wells produce?

Wrong wrong wrong!

* Look at pages 25, 36, 38 and 39 of the BEXP presentation: The more recent wells are the better performers, not the ones done first/earlier!

* The 70 bpd production figures cited on the NDIC website are for all wells of North Dakota, including hundreds of old stripper wells dating as far back as the 50's. If you look at the total oil production by formation figures for last year, you'd discover that only 11% of North Dakota's oil last year was produced from the Bakken - fully half of the state's oil was produced from the Madison Formation, which is a legacy field dating back to the 50's or 60's. The Bakken itself last year produced 204,716,740 barrels from 2,341 wells (at year end), which translates into an average of 240 barrels/day.

But they aren't. Some wells will produce a very healthy profit. But most will be losers.

Wrong once again! You've been reading too much Art Berman (whose argument you're copying refers to shale gas, not shale oil). Some of these wells won't have a good return on investment, but even with $70 oil most will. See calculation on numbers above. Oh - and BTW - your figure of $70/barrel for Bakken oil is also wrong. The current price of WillistonBasin Sweet is $91.50/barrel. Which of course makes the economics even better.

First, you are talking about the entire Williston Basin, which includes production from Montana, Alberta, and Saskatchewan.

Some of those projects will undoubtedly benefit Bakken production in Canada, but most Bakken production is in ND and that is certain to be true for ... well, as long as oil is being produced from the formation. The play is expanding back into Montana lately, but so what? It makes no difference whether 1 million bpd of Bakken production comes all from ND, half each from ND and MT, or all from MT. It's still a million bpd. There are also projects being built in the Canada Bakken which aren't on that list.

But you are not right and are hyping marginal oil production just as the clowns were hyping unprofitable shale gas not that long ago.

My friend's son is making $46 bucks an hour drilling over in North Dakota. The winters are cold beyond belief, but at least a working man can support a family on it.

Absolutely. I talk to drilling companies and they are in agreement that there are plenty of decent jobs for people willing to do them in the oil patch. A young man who is willing to work hard and is careful about his spending patterns should be able to do very well as long as he keeps reserves to carry his family through the slow periods in the sector.

Wow, this was almost stunning in its ignorance! First of all, the profitability of any project is not determined by cash flow, it's determined by its return on investment. And if you look at ppg. 34-39 of the BEXP presentation I linked above, you'll learn that, given the costs and prices discussed above, typical Bakken wells will reach the ~100K-120K total production anywhere from 100 to 300 days after completion. That's just 4-10 months until the well is paid for and profitable.

Stunning ignorance? You provide a link (page 13) that shows that in one of the best formations only one in eleven wells reached 120,000 barrels of production in the first 300 days yet claim that is what the typical well will do and you call me ignorant? And let us not forget what the company discloses. Its presentation states, “BEXP’s Ross Three Forks wells have significantly outperformed other operators’ Ross area wells,” which means that theirs are not the typical Bakken wells but cherry picked examples.

What matters for the big picture s the average output out of the average well drilled, not how well the best wells do. Which is why an accurate EUR figure and cash flow reporting matters. Had you bothered to read the disclaimers you would know just how questionable many of the claims really are. For example, we read, “In this presentation, the term EUR, or estimated ultimate recovery, refers to the Company's internal estimates of hydrocarbon volumes that may be potentially discovered through exploratory drilling or recovered with additional drilling or recovery techniques. These estimates do not necessarily represent reserves as defined under SEC rules or the Society of Petroleum Engineer's Petroleum Resource Management System and by their nature and accordingly are more speculative and substantially less certain of recovery and no discount or other adjustment is included in the presentation of such estimates.”

I kept reading similar hype about shale gas and look where that has ended up for the operators. Now that they have failed in shale gas we are supposed to buy the shale oil story and forget all of the gimmicks of the past few years? That may play well to the ignorant but not to those of us who care about reality and actual returns.

* Look at pages 25, 36, 38 and 39 of the BEXP presentation: The more recent wells are the better performers, not the ones done first/earlier!

The most recent wells have been drilled in the company's best area. But for the Bakken as a whole the easiest formation, the Middle Bakken, has already been picked over. While there have to be some very prolific sections the future will mean lower production rates for the average well. Which is why even many of the 'optimists' are predicting a decline some time over the next five to ten years.

* The 70 bpd production figures cited on the NDIC website are for all wells of North Dakota, including hundreds of old stripper wells dating as far back as the 50's. If you look at the total oil production by formation figures for last year, you'd discover that only 11% of North Dakota's oil last year was produced from the Bakken - fully half of the state's oil was produced from the Madison Formation, which is a legacy field dating back to the 50's or 60's. The Bakken itself last year produced 204,716,740 barrels from 2,341 wells (at year end), which translates into an average of 240 barrels/day.

The old wells are economic. They have already been depreciated and have made their owners a decent return. The same is not true for the new wells. While the initial production rate is OK at around 2,900 bpd that drops off sharply and by the time two months have rolled around you are looking around 830 bpd. And as I pointed out, that production comes from the best formations that are the easiest to develop. Not very promising when a company is looking at spending hundreds of millions to get a production rate of 12,000 bpd that has a high natural deletion rate.

Wrong once again! You've been reading too much Art Berman (whose argument you're copying refers to shale gas, not shale oil). Some of these wells won't have a good return on investment, but even with $70 oil most will. See calculation on numbers above. Oh - and BTW - your figure of $70/barrel for Bakken oil is also wrong. The current price of WillistonBasin Sweet is $91.50/barrel. Which of course makes the economics even better.

Here you go. North Dakota Sweet is going for $78 a barrel, not $91.50.

And with the drilling costs rising so rapidly, the economics do not look very good at all. Horizontal drilling and tracking is expensive and once the sweet spots in shale formations are mature the returns collapse very quickly. Which is why few producers are cash flow positive.

It has mostly due to local supply and the lack of adequate transport. The new pipelines will help as would refinery capacity expansion, if permitted. But for now the discount to the world price is very steep.

"The old wells are economic. They have already been depreciated and have made their owners a decent return. The same is not true for the new wells."

Wow, the stunning logic of these statements just keeps getting better and better ...

Breaking news: At some point the new wells will become old wells. By then they'll already have made their owners a decent return and become depreciated. Duh.

And no, the production profiles of those wells in the BEXP presentation weren't "cherry picked" wells, they were average performance of wells in various sub-areas of the Bakken. In each of the charts on pgs. 35-39, it even says, "(Avg. Curves for Wells)."

You have to make things up in order to defend your position. Pathetic.

Wow, the stunning logic of these statements just keeps getting better and better ...

Breaking news: At some point the new wells will become old wells. By then they'll already have made their owners a decent return and become depreciated. Duh.

You are not paying attention. The depletion rates for the old wells that are still producing was manageable and drilling costs were low. That is not the case with horizontal wells that require fracking and show depletion rates of around 75% per year.

And no, the production profiles of those wells in the BEXP presentation weren't "cherry picked" wells, they were average performance of wells in various sub-areas of the Bakken. In each of the charts on pgs. 35-39, it even says, "(Avg. Curves for Wells)."

VangwIV is clueless.I'm a mineral owner in north dakota.12/10 $78.78 a barrel well head price 01/11 $77.48 02/11 $76.39 03/11 $91.08 04/11 $105.13 05/11 $96.46 06/11 $92.40 that what DENBURY RECEIVE PER BARREL WELL HEAD PRICE AND ALSO THEY GET INCOME FROM GAS THATS PRODUCED FROM THE WELLS IF THERE IS A GAS PIPE LINE IN THE AREA

VangeIV is clueless.I'm a mineral owner in Dunn county ND.Denbury well head prices on my well are 12/10 $78.78 01/11 $77.48 02/11 $76.39 03/11 $91.08 04/11 $105.13 05/11 $96.46 06/11 $92.40.The wells I have through Marathon Oil get about $4.oo more a barrel.I (they) also get income from the gas produced from the wells.The wells do drop quickly free flowing,then they are put on a pump and pop back up.These wells will be refracked multiple times over the life of the wells.